SEC-registered guaranteed mutual funds, sometimes known as principal protected mutual funds, have existed since at least 2002. These funds suffer from several drawbacks including that they are only available for purchase by investors during an initial offering period (after which the fund is closed to new investors) and that they employ a dynamic hedging strategy known as Constant Proportion Portfolio Insurance (“CPPI”) which can result in a low or zero allocation to the desired risky market (with a correspondingly high allocation to less risky fixed-income instruments).
SEC-registered principal-protected closed-end funds have also been in existence for some time. These funds suffer from the same drawbacks as well, including that they offer uncertain liquidity because investors have no contractual redemption rights unlike in an open-ended mutual fund, and, apart from the time of the initial offering, investors may not be able to purchase (or later, sell) shares at a price that corresponds to the net asset value of the fund.
Known guaranteed mutual funds are the beneficiary of a financial guarantee from a highly-rated financial institution. These guarantees are provided in exchange for a fee that is determined in advance. Such guarantees do not suit funds whose investment strategies might cause the cost of the guarantee to change significantly. These funds are thereby limited to pursuing CPPI-based strategies (of the type described above). Since even CPPI-based strategies are subject to small changes in the cost of the related guarantee, guaranteed funds are not made available for sale to new investors after the initial offering period although redemptions are permitted.
Therefore what is needed is a guaranteed mutual fund that can be continuously offered to investors and remain fully invested in risky securities or strategies, while offering investors an assurance of no less than a minimum return on their invested principal.